Our credit policy has failed SMEs

The government should not be surprised that commercial banks have failed to deliver on their promise of keeping their vaults open for businesses to borrow.

This is because the banks, like any other financial institution or entrepreneur, are averse to taking risks when a country is going through a crisis.

And the coronavirus outbreak has been described as the biggest health and economic crisis that has hit the world since the World War II.

Local banks and other financial institutions are best known for rationing and overpricing credit than for helping businesses thrive even in the best of times.

This means Treasury Cabinet Secretary Ukur Yatani and Central Bank of Kenya Governor Patrick Njoroge, the two gentlemen at the apex of the country’s financial system, may have to think outside the box on how they can help businesses stay afloat during and after the pandemic is contained.

Frozen new credit

This is because the traditional fiscal and monetary tools used to stimulate economies during downturns are not working, at least, in Kenya.

This proposition is borne out of the fact that the banking and financial institutions have frozen the issuance of new credit, despite the Central Bank slashing the Central Bank Rate (CBR) and the Cash Reserve Ratio (CRR) by one percentage point each to increase the money supply that should have been available for onward lending to borrowers.

CBK freed up Sh35.2 billion by cutting the CRR from 5.25 to 4.25 per cent. There is also no evidence that the banks have reduced their lending rates in line with the lowering of the CBR from 8.25 to 7.25 per cent.

Although the CBK governor explained that it would take about two months before banks start passing on the benefit of lower credit to borrowers, only the most optimistic Kenyan expects this to happen.

The pessimism is backed by past evidence where banks were quick to pass on an increase in CBR to customers while dragging their feet when the reverse happened.  

As the Treasury and CBK mandarins grapple with the problem of how to help struggling enterprises, they should also spare a thought for micro, small and medium-sized enterprises (MSMEs) that according to official data only got Sh393 billion out of the Sh2.5 trillion loaned out by banks in 2018.

The irony is that MSMEs contribute more than a third of the country’s total national output, translating to Sh3.4 trillion, besides the sub-sector employing about 14.9 million people.